01/06/20

A Pandemic Budget

In association with Nedbank.

The new Minister of Finance tabled his budget against a backdrop of a global economic crisis, brought on by the COVID-19 pandemic and mitigation response thereto, of proportions not seen in close to a century. However, following nearly five years of little or no growth, while most of the rest of the world was growing on average by over 3%, we entered this crisis in a materially worse economic state than many other economies.

Over the last decade Namibia ran fiscal deficits in nine of the 10 years (eight out of 10 with deficits exceeding 5% of GDP, four of which exceeded 7% of GDP), and an increase in the debt stock from 16% of GDP to close to 55% of GDP. The nation entered this crisis with very little firepower with which to offset the economic shock presented by the pandemic. As a result, the ability to counterweight the economic shock is highly constrained. This, in turn, will mean that economic recovery is likely to be very slow, as large-scale retrenchments and business closures can be expected should the crisis not moderate in coming months.

The current budget cannot be blamed for history; however, history certainly defines the current budget and importantly, the outlook. Nevertheless, it would be inappropriate to judge this budget through the usual lens. Indeed, much of the world will run enormous budget deficits this year, with revenue falling and expenditure increasing. In this, Namibia is no exception. However, the 12.5% of GDP deficit pushes the fiscus close to the end of its fiscal rope, and reform is fast approaching the non-optional point.

The big story in this year’s budget is the decline in revenue. With the state expected to collect just N$51.4 billion this year, it takes total revenue collections back five years to FY2015/16 levels. This is a result of a collapse in domestic revenue sources, owing to the COVID-19 pandemic and response measures thereto. SACU revenue has improved this year, but now accounts for 43.4% of total revenue – presenting a concentration risk. The outlook for SACU revenue is also weak, given the slowdown in international trade. Thus, the overall revenue outlook for the coming years is poor and, unless expenditure can be reduced significantly, will see Namibia continue running large budget deficits.

This year’s budget sees Government forecasting total expenditure of N$72.8 billion, the most in the nation’s history and leaving a deficit of N$21.4 billion. Of this expenditure, N$57.9 billion is directed towards operational expenditure, N$6.4 billion towards development expenditure, and N$8.4 billion in interest payments. The single largest expense is once again the civil service wage bill at N$28.7 billion, which is 49.6% of the operational budget and 55.9% of revenue.

The social sector is, unsurprisingly, the big winner in this year’s budget – receiving N$31.8 billion or 43.7% of total expenditure (and 49.5% of expenditure if interest payments are excluded). The large increase in spending is targeted towards areas such as medical equipment and services, additional spending on broadcasting, assisting the education sector in dealing with the pandemic, and social protection.

The large allocation to finance is mostly for subsidies and other transfers, in other words paying over funds to other governmental organisations and funding PSEMAS. The N$772 million for the Emergency Income Grant is included. More than half this Ministry’s allocation is for this year’s interest payments.

The Ministry of Education, Arts and Culture will see over 75% of its N$14.2 billion budget be directed towards personnel expenditure alone, with the next largest cost being payments to government organisations such as UNAM, regional councils, etc.

The Ministry of Health and Social Services receives an N$8 billion budget, with just under half (about N$3.7 billion) going to personnel expenditure. N$930 million has been made available to the Central Medical Stores for materials and supplies, as well as nearly N$2.0 billion for other services and expenses related to clinics and hospitals for disease control and prevention – evidently directed towards the ongoing pandemic.

A record deficit leaves the question of how it will be funded. Typically, Government opts for an 80-20 split: 80% local , 20% foreign. Some of the foreign funding will come from the African Development Bank. The Minister made reference to ‘own savings’ for domestic financing, suggesting use of the sinking funds (ZAR and USD) to fund much of this year’s deficit, the remainder being through local issuance of debt. While this is possible, appetite for such large deficits will quickly be satiated – meaning that we will not easily be able to finance deficits of similar magnitude in future.

The poor outlook for revenue may well force Government’s hand into containing expenditure. The unsustainability of the civil service wage bill has been noted for several years now. Frankly, much of Namibia’s future prospects ride on what is delivered at this year’s Mid-Year Budget Review – not just in the medium-term forecasts, but also in policy pronouncements and a clear strategy to meaningfully realign expenditure with materially lower revenue.